Cielo Follows Starbucks Amid Brazil Pay-by-Phone Doubts

By Christiana Sciaudone -
Jun 27, 2013

The rampant fraud that spurred
Brazil’s banking industry to become one of the world’s most
technologically advanced is turning into a hurdle as credit-card
processor Cielo SA (CIEL3) tries to persuade consumers to use mobile
phones for payments.

Cielo, which has had phone-payment capabilities since the
end of 2010, will expand its mobile and e-commerce offerings as
soon as next year in Brazil after buying Redwood City,
California-based Merchant e-Solutions for $670 million in
September, Chief Executive Officer Romulo Dias said.

Brazil’s biggest card processor is looking to digital
applications -- used in the U.S. to pay for a range of products
from Starbucks Corp. (SBUX) lattes to street parking in downtown Salt
Lake City -- to help offset a forecasted drop in fees amid
increased competition.

“The world will use mobile -- we have to get in,” Dias
said in an interview at Bloomberg’s Sao Paulo office. “People
think it’s not a secure transaction, that it’s not encrypted.”

Cielo also expects to boost revenue by offering services
such as the management of loyalty programs for retailers, Dias
said.

While Brazil has been quick to adopt advances such as
table-side card readers and biometric automated teller machines,
the mobile-phone technology may face resistance from consumers
afraid of credit cards being cloned, said Carlos Eduardo Picchi Daltozo, a Sao Paulo-based analyst at BB Investimentos.

Electronic fraud cost 1.4 billion reais ($640 million) last
year, after a toll of 1.5 billion reais in 2011, according to
the Brazilian Federation of Banks, known as Febraban.

‘Main Focus’

Brazilian banks are “among the most advanced in the
world,” Daltozo, who recommends buying Cielo shares, said in a
telephone interview. “The question of security is the main
focus that companies have in getting more people using mobile-payment platforms.”

Mobile-banking offerings are already available at U.S.
banks, including Citigroup Inc.’s Citibank and Bank of America
Corp. Both have smartphone apps and banking via text message.
U.S. consumer companies such as Starbucks say their customers
are embracing the technology.

“We are approaching 4 million U.S. mobile payment
transactions per week, accounting for roughly 10 percent of
total U.S. tender,” Linda Mills, a spokeswoman for Seattle-based Starbucks, said by e-mail.

Loyalty programs for store owners, social-network marketing
through Facebook Inc. (FB)’s namesake site and mobile apps are part
of Cielo’s plan to transform into a “services company,” with
Brazil’s central bank expected to begin regulating the market
soon, Dias said.

Competitive Threats

Rules under consideration could end exclusive agreements
between companies and popular meal-voucher programs, as well as
break Barueri, Brazil-based Cielo’s hold as the nation’s only
processor of American Express Co. (AXP) cards. It is also Brazil’s
only publicly traded card processor.

New competitors, including Banco Santander Brasil SA and
Banco do Estado do Rio Grande do Sul SA, known as Banrisul,
probably will get greater access to consumers and drive down
fees in coming years, Dias said.

Those companies each have less than 5 percent of the
market, trailing Cielo’s 53 percent and about 37 percent for
Redecard SA, which was bought in 2012 for $5.17 billion by Itau
Unibanco Holding SA (ITUB), Latin America’s largest bank by market
value.

“Cielo is the market leader and has the most advantages,”
said Francisco Kops, an analyst at Banco Safra SA, in a
telephone interview from Sao Paulo. “It’s the company that has
the most to lose.”

Index Beater

Cielo rose 11 percent this year through yesterday as the
benchmark Ibovespa index fell 23 percent. That left the shares
trading at 16 times estimated 2013 earnings, compared with an
average multiple of 11.8 for Ibovespa companies, data compiled
by Bloomberg show. The stock rose 3.9 percent, the most since
October, to 54.90 reais at the close in Sao Paulo.

Cielo expanded its market share in six of the last nine
quarters, Dias said.

“Our expectation was that after the Itau merger, Redecard
would become more aggressive in conquering market share,”
Daltozo said. “But this hasn’t happened yet.”

Redecard should start picking up market share next year
after it is integrated into the bank, he said. An Itau press
official declined to comment.

Cielo’s purchase of Merchant e-Solutions will help
“differentiate the company in the future,” Dias said.

“People are becoming more familiar with buying online,”
said Dailton Felipini, a consultant and editor of e-commerce.org, a website dedicated to online-shopping research
and articles. “Card operators and processors are conscious that
in terms of Internet sales, the sensation of security is
fundamental.”